DBRS Confirms the Kingdom of Sweden at AAA, with Stable trend

DBRS Ratings Limited (DBRS) has confirmed the long-term, foreign and local currency issuer rating of the Kingdom of Sweden at AAA, with Stable trends. DBRS has also confirmed the short-term, foreign and local currency ratings at R-1 (high), with Stable trends.

The confirmation of the Stable trend on all ratings reflects DBRS’s view that the challenges faced by the sovereign are manageable and are being addressed proactively. The ratings could be subject to downward pressure, if domestic or external shocks were to lead to a materially higher debt stock, or if sudden stops of capital inflows and rapidly rising borrowing costs were to impair the sovereign’s access to liquidity.

The AAA ratings primarily reflect Sweden’s consistently strong fiscal position. Public finances have delivered annual primary surpluses of 3.2% on average every year since 1996. Public spending has declined as a share of GDP from almost 70% in the mid-90s to 51% in 2007. The strong fiscal buffers accumulated have allowed the government to embark on countercyclical fiscal policy to counteract the financial crisis, with limited effects on fiscal figures. In 2013, the primary balance turned negative with a small -0.3% of GDP. The primary balance is expected to remain negative in 2014, at -0.6% of GDP. The Budget Bill 2014 is set to be moderately expansionary, leading the general government finances to a deficit of 1.4% of GDP. The ratings are also underpinned by the country’s healthy external accounts, which are the result of Sweden’s successful transition from an exporter of goods to an exporter of services.

Since 2004, the surplus in goods has been on a declining trend, primarily because exports are growing slower than GDP. However, the decline has been mitigated by a comparatively low energy trade deficit (1.6% of GDP between 2000 and 2013 compared to the EU average of 2.1%), resulting from Sweden’s domestic production of renewable energy sources and nuclear power. Counterbalancing the declining surplus of the trade-in-goods, the country’s external position relies on a diversified mix of services exports, which includes business services, royalties, computer & information services and transport and increasing contribution from financial activities. The overall trade surplus thus declined only marginally between 2000 (5.2% of GDP) and 2013 (4.6%). The current account surplus was 6.2% of GDP in 2013, compared to 4.1% in 2000, benefitting from income inflows as a result of the improved external asset position. These inflows were supported by the increased lending activity of banks abroad, which reached over 78% of GDP in 2013, as well as by the doubling of the central bank’s foreign currency reserves between 2000 and 2013, to 11% of GDP.

In addition, Sweden’s ratings benefit from its solid economic performance that is expected to continue. Over the past decade, Sweden’s output growth was 2.1% on average, well above the OECD average of 1.7% and the European Union average of 1.0%. The above-peers performance was driven by high labour productivity growth, at 1.4% on average, on par with the U.S. and 40% higher than the OECD average. Sweden’s economic prospects remain very strong. The IMF projects that between 2013 and 2019, Sweden’s output will expand by 17%, just below the U.S. at 18%. Finally, the ratings are supported by a credible institutional framework. The Swedish fiscal policy framework aims at preserving the long-term sustainability of public finances. It includes three fiscal rules, such as a requirement to achieve a surplus equivalent to 1% of GDP in the general government balance over a business cycle. This fiscal framework allows the government to use the fiscal position counter-cyclically to moderate the negative impact of macroeconomic shocks. The financial stability framework has also improved following the 2008 financial crisis. A financial stability council is now tasked with identifying and addressing risks arising in the financial system.

Managing financial stability risks represent the main challenge for the sovereign. Risks are both domestic and external. Domestically, Swedish households are highly indebted, with liabilities amounting to over 170% of income in 2013, as a result of house prices that more than doubled in real terms over the past twenty years. Data also show that the debt ratio for low-income earners, at almost 600%, tends to be significantly higher than that of other income groups, heightening vulnerabilities to a rise in interest rates and unemployment. Total assets of approximately 600% of disposable income represent an important buffer, but their distribution is unequal compared to debt figures. Moreover, about a quarter of total assets are subject to fluctuations in value, and half of them are concentrated in real estate. Preserving a high debt repayment capacity of households is particularly important in the context of Sweden’s large domestic banking sector, which own assets equivalent to over 400% of GDP and is highly reliant on wholesale funding sources. Wholesale securities account for approximately half of total bank funding, and 75% are denominated in foreign currencies. Therefore, preserving market confidence in Swedish banks is key for stable inflows of liquidity towards the country’s banks.

With regard to this, DBRS notes that banks continue to bolster their resources to withstand a stressed environment. They remain strongly profitable and have increased their capital base. The core equity Tier 1 (CET1) capital ratio under Basel III stood at over 16% in March 2014 at the major four banks. Regulatory changes will also make the system more resilient to shocks, in DBRS’s view. Following the May 2014 proposal of the Swedish FSA, domestic banks will likely be subject to increased regulatory risk-weightings on mortgage loans (25%, compared to the current 15%) within the Pillar 2 framework. Additional regulatory changes may also occur over the next few months, as the Riksbank recommends activating the countercyclical capital buffer of up to 2.5% of risk-weighted assets.

Another challenge for Sweden is that government debt is somewhat exposed to maturity and refinancing risk. At end-2013, government debt had a low average maturity of 6.1 on the local currency debt and 2.1 years on foreign currency debt, which implies that approximately half of the total debt stock matures by 2017. Foreign currency debt outstanding was 21% of the total in 2013. To counterbalance liquidity risk, Sweden holds FX reserves that, at end-2013, accounted for approximately half of FX debt maturing in 2014 and 14.4% of total FX outstanding liabilities.

Notes:
All figures are in Swedish kronor (SEK) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

These can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Ministry of Finance of the Kingdom of Sweden, Sveriges Riksbank, Statistics Sweden, European Commission, Statistical Office of the European Communities, IMF, OECD, BIS, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For additional information on this rating, please refer to the linking document under Related Research.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Claudio Columbano
Rating Committee Chair: Roger Lister
Initial Rating Date: 17 April 2012
Most Recent Rating Update: 4 June 2013

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